Consumer credit reports have changed in many ways over the past fifty years. Before that, credit reports were fraught with inconsistencies and inaccuracies. It was routine for lenders to refuse to extend credit to consumers because of erroneous information in their credit reports. These errors could be based on mistaken identities or inaccurate information or omission.
Federal law has ensured the increased reliability of credit reports. Additionally, consumers now have the right to know the sources of information in their credit reports, the right to get copies of credit reports and the right to dispute and challenge the accuracy of information. In this module, we’ll learn about the impact of the Fair Credit Reporting Act of 1970. We’ll discuss how it helps consumers, how credit reports are compiled, and the rights and duties of parties involved in a credit transaction.
The Fair Credit Reporting Act
Before the passage of the Fair Credit Reporting Act of 1970, a consumer had no reliable way to obtain a copy of his credit report. He would not necessarily know why a lender would deny him credit and had few options for follow-up after denial. Credit reports were cloaked in secrecy. A consumer was vulnerable with no right to know what information was reported. He couldn’t even find out if the information that was the basis for a credit denial concerned him or if it was a case of mistaken identity.
Congress enacted The Fair Credit Reporting Act for several reasons. First, it was meant to “prevent the misuse of sensitive consumer information by limiting recipients to those who have a legitimate need for it.” Second, the Act sought to “improve the accuracy and integrity of credit reports.” Finally, Congress enacted the Act to “promote the efficiency of the nation’s banking and consumer credit systems.”  The Act sought to achieve these goals by:
- creating ways to protect the confidentiality of information collected by credit bureaus;
- developing methods to send notice to a consumer when derogatory material is reported and giving him an opportunity to correct adverse information; and
- instilling procedures for removing irrelevant and outdated information from a consumer’s credit file. 
The Fair Credit Reporting Act created regulations for consumer reporting agencies, requiring them to keep information confidential, accurate and relevant, and to properly utilize a consumer’s information. Congress revised the Act in 1996 to impose accuracy and re-investigation duties on furnishers of information as well as users of the reports, such as creditors and employers. The 2003 amendment, under the Fair and Accurate Credit Transactions Act, requires a furnisher to investigate disputes and correct and update information that it discovers to be inaccurate.
Today, three major national credit reporting agencies gather and centralize credit information on nearly 200 million United States consumers. These agencies gather information from data furnishers, creditors, collection agencies and from public records including collections and civil lawsuits and bankruptcies. The agencies match information into a file with personal information, such as Social Security numbers, addresses and birthdates.
The agency will provide the information to data users who analyze the information and assess the risk of transacting business with a consumer. The data is synthesized into a predictive model called a credit score, allowing a creditor to assess a consumer’s eligibility for a product or service within minutes of applying. An example of the predictive model is the FICOÒ score, created by the Fair Isaac Corporation and widely accepted in the United States as a measure of a consumer’s credit risk.
Though the Fair Credit Reporting Act has had many beneficial effects, consumers may still be plagued by inaccurate credit reports that include errors or omit necessary explanatory information from time to time. According to a Congressionally mandated study conducted by the Federal Trade Commission, one in five consumers had an error on one of their credit reports that was corrected after being brought to the attention of the credit agency. According to this study, “about 20 percent of consumers who identified errors on one of their three major credit reports experienced an increase in their credit score that resulted in a decrease in their credit risk tier, making them more likely to be offered a lower auto loan interest rate.”
Rights and Duties of Parties Involved in a Credit Transaction
The Fair Credit Reporting Act establishes different rules for the various categories of parties involved in a credit transaction:
– credit reporting agencies,
– providers (or “furnishers”) of consumer information
– users of consumer information, and
First, let’s begin with reporting agencies, which are defined as “any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.”
The reporting agency has two duties. The first is a duty to distribute consumer reports. To comply, the consumer reporting agency must obtain the identity of the person requesting the consumer report and ensure that the report serves a permissible purpose. It may also provide a consumer report to a third party upon the consumer’s written request. Finally, a consumer credit report can be provided to the government in response to a court order or grand jury subpoena or for child support enforcement. 
If the consumer report serves an employment purpose, the agency needs a certification from the user that it has provided the consumer with a disclosure of rights and the consumer has provided written authorization to the agency to distribute the report. If an employer takes an adverse employment-related action based on its employee’s consumer report, such as firing or suspending him, then it must provide the employee with an adverse action notice, which must include a copy of the report and a description of the rights of the consumer under the Act.
Other examples of a “permitted purpose” for distribution include:
- distributing the report to a lender undertaking a new credit transaction with the consumer;
- distributing to a third party reviewing an existing account to determine if the customer still meets its terms;
- distributing to an insurance underwriter;
- determining eligibility for a license or other government benefit which considers the applicant’s financial responsibility or status; and
- other legitimate business needs initiated by the consumer.
A reporting agency’s second duty requires it to ensure the accuracy of a credit report. To comply with this duty, a reporting agency must delete obsolete information and refuse to report adverse information if it concerns activity that took place more than seven years prior to the report’s date. Bankruptcies may not be reported after ten years.
A consumer can dispute the accuracy of information in a consumer report. If he does so, the consumer reporting agency must conduct a reasonable investigation to determine whether the disputed information is inaccurate and it must, within 30 days of receiving the dispute, either note that the matter is disputed or delete the information. Within five business days of the date of dispute, the agency must notify the provider of the information that the consumer is disputing the consumer report’s information.
Failure to perform a reasonable investigation subjects the agency to civil liability and a federal enforcement action.
Now, let’s look at the duties and rights of an information furnisher. An information furnisher provides information about the consumer’s debts, repayments and other factors relevant to the consumer’s credit. Examples of furnishers may include mortgage loan servicers, credit card companies and debt collectors. Information provided can include an account’s opening date and information regarding whether the consumer’s payments are timely.
A furnisher is prohibited from providing any information about a consumer to a consumer reporting agency if it knows, or has reasonable cause to believe, that the information is inaccurate. The furnisher has a duty to update and correct information previously provided if it is not complete or not accurate. If a consumer disputes information with the furnisher, then the furnisher must advise the consumer reporting agency of the dispute. Other furnisher duties include the obligation to notify a credit reporting agency if a consumer’s account is closed or that an account is delinquent and the dates of any delinquencies.
The third party that has rights and duties under the Act is a user of creditor information. A user has two primary duties –to make proper disclosures to consumers and to use the report for permissible purposes. Should a user take any adverse action that is based on any information contained in a consumer report, it must provide this adverse information to the consumer to allow her to challenge the negative information in the consumer report.
The Daugherty v. Ocwen Case
To demonstrate how specific the Fair Credit Reporting Act is regarding duties and deadlines, let’s look at an example. In Daugherty v. Ocwen and Equifax, David Daugherty and his wife took out a note and mortgage to purchase a home in 1999. In 2011, Ocwen Loan Servicing acquired the mortgage from the original lender. By 2012 the Daughertys were behind on their monthly payments by over $6,000. Ocwen reported the delinquency to several credit reporting agencies and initiated foreclosure proceedings. One month later, the homeowners sought to cure the delinquency and reinstate the loan.
Ocwen learned that the original lender had used an incorrect loan origination date in the information furnished to the credit reporting agencies, stating it was August 1999, when, in fact, the origination month was July of 1999. Ocwen, in its role as furnisher, attempted to correct the date to July 1999. Unfortunately, Equifax misinterpreted this information and created a new loan in Mr. Daugherty’s credit file, resulting in an inaccurate report that Daugherty had two credit lines with Ocwen.
After the Daugherty’s cured the default and Ocwen reported the loan was no longer in default or foreclosure, Equifax corrected only one of the credit lines. The uncorrected tradeline continued to reflect that an account in Mr. Daugherty’s name was in foreclosure. From April 2012 through July 2014, Equifax therefore incorrectly reported an account opened in August 1999 that was over 120 days past due and in foreclosure, and at the same time correctly reported an account opened in July 1999 that was current and in good standing. The “August 1999” account, of course, was nonexistent.
Mr. Daugherty learned of the erroneous information on his credit report when he attempted to refinance his mortgage. He notified both Ocwen and Equifax that the credit report contained errors. He disputed the information, providing proof that his account was current and not in foreclosure. Equifax, upon receipt of the disputes from Mr. Daugherty, requested from Ocwen verifications of the information that Ocwen had furnished. Equifax transmitted separate requests for “automated credit dispute verifications” for each tradeline. Ocwen did not notice the inconsistencies between the two disputed verification requests and responded to Equifax that the information submitted was “verified as reported.”
Over the next sixteen months, Ocwen received 23 dispute verification requests from Equifax. In response to nine of the dispute verification requests, Ocwen “verified” as correct information that was, in fact, incorrect. In response to two dispute verification requests, Ocwen updated the account status from “Account 120 days past the due date” to “Current account” but did not correct erroneous entries in the same account stating “5 or more payments past due” and “Foreclosure proceedings started.”
Mr. Daugherty filed a civil action for actual damages and punitive damages under the Fair Credit Reporting Act against Ocwen for failure to investigate and to correct erroneous information on his credit report. In addition to compensatory damages, the Fair Credit Reporting Act permits an award of statutory and punitive damages for willful violations. The term “willfulness”, within the meaning of the Act, includes acting with “reckless disregard” of one’s obligations under the statute. The jury found that Ocwen had willfully failed to perform a reasonable investigation regarding the true status of Daugherty’s account with Ocwen and awarded Mr. Daugherty over $6,000 in compensatory damages, and $2.5 million(!) in punitive damages. An appellate court later reduced the punitive damages award to $600,000.
Rights of the Consumer
Finally, let’s examine the rights of a consumer in a credit transaction. The Consumer Financial Protection Bureau, a government agency that enforces the Fair Credit Reporting Act, provides extensive information and resources on its website to advise consumers of their rights and to make it easy for consumers to find out what their remedies are in case of questionable conduct by parties in a credit transaction. In addition to these federal recourses, numerous states have their own fair credit reporting acts and can provide consumers with even more remedies. As the Daugherty’s example demonstrates, the most potent tool a consumer has is the right to file a civil action with the potential for punitive damages for a credit reporting agency’s willful or reckless conduct.
Under both federal and state laws, commonly-provided consumer rights also include:
- the right to be told if information in the file is used against the consumer, also known as an adverse action notice;
- the right to know what is in the consumer’s file upon request;
- the right to a free copy of the credit report from each credit reporting agency once every 12 months;
- the right to dispute incomplete or inaccurate information; and
- the right to opt out of prescreened offers of credit and insurance.
In our next module, we begin our study of identity theft, which, according to LifeLock, impacted nearly 15 million Americans in 2017. We’ll learn what it is and about identity theft victims’ rights and remedies.
 Prepared Statement of the Federal Trade Commission Before the United States Senate Committee on Commerce, Science, and Transportation Subcommittee on Consumer Protection, Product Safety, and Insurance, The Accuracy and Completeness of Consumer Credit Reports (May 7, 2013),
 114 Cong. Rec. 24902, August 2, 1968.
 Fair Credit Reporting Act, Pub. Law. No. 91-508, 84 Stat. 1114 (enacted as 15 U.S.C. §§ 1681, et. seq.).
 40 Years of Experience With the Fair Credit Reporting Act, An FTC Staff Report With Summary of Interpretations, Federal Trade Commission (July 2011),
 Id. at 1; Report to Congress Under Section 319 of the Fair and AccurateCredit Transactions Act of 2003 at 2 (January 2015),
 FTC Issues Follow-Up Study on Credit Report Accuracy, Federal Trade Commission (January 21, 2015),
 Report to Congress Under Section 319 of the Fair and Accurate Credit Transactions Act of 2003 at 2, (January 2015),
 FTC Issues Follow-Up Study on Credit Report Accuracy, Federal Trade Commission (January 21, 2015),
15 U.S.C. § 1681a(f).
 15 U.S.C. § 1681b.
 15 U.S.C. § 1681b.
 15 U.S.C. § 1681b.
 15 U.S.C. § 1681c.
 15 U.S.C. §1681i.
 15 U.S.C. §1681s-2
 15 U.S.C. § 1681s-2.
 15 U.S.C. §1681m.
 Daugherty v. Ocwen Loan Servicing, LLC andEquifax Information Services, LLC, No. 16-2243
(4th Cir. July 26, 2017) (unpublished opinion).
 Consumer Financial Protection Bureau, https://www.consumerfinance.gov/consumer-tools/credit-reports-and-scores/ (last visited June 27, 2018).
 Understanding Identity Theft, LifeLock, https://www.lifelock.com/education/how-common-is-identity-theft/ (last visited June 27, 2018).